In August 2016 – two years after the launch of the Shang- hai-Hong Kong Stock Connect
– the Chinese government formally
approved the Shenzhen-Hong
Kong Stock Connect link in a bid
to create a better regulated trading
environment.

The venture was aimed at building
a more extensive investment market
as the region looked to capitalise on
its geographical advantages.

At the time of the announcement it was said investors would
experience increased economic
benefits from both Mainland China
and Hong Kong, as cooperation
between the two regions increases
and Hong Kong’s position in the
financial industry is consolidated.

The regulatory approval signalled
a pointedly more liberal approach
to markets in China, according to
industry experts who referenced
the usually lengthy approval processes in the region.

Historically, China has maintained a ‘closed’ capital account
meaning investors can move money into and out of the region only
through strict approval and regulatory oversight. Chinese authorities
have looked to gradually open up
their capital markets over the past
15 years allowing further foreign
participation.

Similarly, the establishment of
the China Interbank Bond Market
(CIBM) and building on early
developments such as the qualified foreign institutional investor
(QFII), and Renminbi Qualified
Foreign Institutional Investors
(RQFII) initiatives also signal the
‘liberalisation’ of Chinese markets.

The CIBM ruling from February
2016 to provide foreign institutions
quota-free access to the third largest bond market in the world was a
major breakthrough, creating a new
route to the coveted onshore bonds.

The People’s Bank of China’s recent decision to grant an investment
quota for Ireland of 50 billion yuan
under the (RQFII) scheme also
shows an increasing willingness to
work with western governments.

Nicholas Ronalds, head of equities for the Asia Securities Industry
& Financial Markets Association
(ASIFMA), explains the launch
of Shenzhen-Hong Kong Stock
Connect “opened the same sort of
channel to China’s second stock
exchange, home to listings of
mostly smaller-cap, faster growing
Chinese companies”.

Driven by technology

The Shenzhen trading link also
increased exposure for technology
signalling a shift in what is driving
market growth in China, according
to several industry experts.

“This link should provide investors around the world with a convenient way to access China’s new
generation of private sector companies listed in Shenzhen, including
an array of innovative internet and
technology players based in the
Pearl River Delta,” Wong adds.

Florence Lee, head of China sales
and business development EMEA,
securities services at HSBC,
explained prior to the Shenzhen
Stock Connect launch that in the
past, Shanghai covered the traditional stocks which have historically driven growth in the region.

She explained that looking intoShenzhen, “the drivers are moreon the high technology, innovativeindustries and the pharmaceuticalsector, which is driving the newChinese economy and is what theChinese government focuses onmore for long-term sustainability.”The Shenzhen Stock Connectopened the door to China’s ‘SiliconValley’, presenting attractive invest-ment opportunities to market par-ticipants as the region moves awayfrom the manufacturing and exportled model of the past to a domesticconsumption driven economy.

It was officially launched on
5 December 2016, but the launch
produced underwhelming results compared to its Shanghai
counterpart.